by Alasdair Macleod, GoldMoney:
Following the new Kwarteng/Truss economic policies revealed in last week’s mini budget, the widespread condemnation is a reflex Keynesian response from a world which has become hostage to erroneous economic and monetary groupthink in its major institutions.
Kwarteng has jogged the global statist establishment out of its complacent drift into totalitarianism. His is a wake-up call to markets everywhere, a catalyst for the unwinding of accumulated market distortions. Mounting criticism from all quarters is shooting the messenger, but the message has been delivered.
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In one important respect, the criticism is valid. Kwarteng must address the budget deficit urgently by taking steps to reduce the size of the state as a proportion of the total economy. Only then, can inflation be conquered, and the pound stabilise. In another respect, the new policy is sensible: by plotting its own free market/Hayekian course, Britain can emerge out of the crisis sooner than other nations stuck in the current democratic-socialist paradigm.
If we assume that Kwarteng does address the size of the state and eliminate budget deficits as early as practically possible, he will have a practical plan for a post-crisis Britain. Economic recovery can than happen sooner rather than later, a major consideration given that the next general election is in a little over two years’ time.
It is too late to avoid the gathering global crisis, the financial consequences of which are bound to devolve in large measure on London’s financial centre. Indeed, Kwarteng’s wake-up call may be the trigger for a financial avalanche. But what he is unlikely to realise is that the gathering crisis is so severe that even the continued existence of fiat currencies will be threatened, with the euro and sterling being particularly vulnerable.
In this article, I also comment on the Bank of England’s failure as an institution, whose future role in monetary affairs should be strictly curtailed. And I advocate the abandonment of all trade tariffs, with the possible exception of agriculture for political reasons. These are fundamental reforms which must accompany free market policies.
We must proceed with our commentary ignoring the existential threat to currencies if it is to be relevant to the government’s economic policies and their global impact.
The Keynesians don’t like it…
The timing of Kwarteng’s mini budget was calamitous, in that it happened while currency chaos was already roiling markets, not just for sterling, but the euro, yen, yuan, and a host of others which are all suffering from a mounting flight into the dollar. And it wasn’t just currencies. The increasing realisation that interest rates globally will continue to rise has driven a flight out of anything deemed riskier than short-term US Government debt.
Before Kwarteng took to his feet in Parliament last week, US Treasury yields were higher than the equivalent gilts. Even without intervention, this contravened market wisdom and needed correcting.
As a matter of fact, Kwarteng’s budget was mostly known in advance — only the detail needed filling in. The problem with it is not just febrile markets, but a tax-cutting, supply-side budget was launched in markets dominated by Keynesian actors. It is reminiscent of the 364 eminent economists (all Keynesians) who strongly criticised Sir Geoffrey Howe’s 1981 budget — and were proved wrong. The letter’s introductory paragraphs are reproduced below.
Lord Lawson, who followed Sir Geoffrey as Chancellor wrote in his autobiography that no sooner had these economists criticised the 1981 budget, than economic recovery began. And seven years later, he also wrote the following:
“We had to dispel the notion that the way to economic success lies through a sort of fiscal levitation. That was the abiding post-war delusion—that governments could spend and borrow their way to prosperity and fine-tune the performance of the economy through something known pretentiously as demand management…It used to be an establishment nostrum that you need a budget deficit to get economic growth. That was the belief which lay behind the notorious letter by 364 economists in March 1981. We have given the lie to that, decisively. There can no longer be any argument about it. Everyone—or almost everyone—now accepts that the proper role of macro-economic policy is to keep downward pressure on inflation and to maintain a stable framework in which the private sector can expand.” [i]
In defying Keynesian orthodoxy, Kwarteng faces a similar problem today. But impartial observers will have noted that before Kwarteng’s intervention, the establishment’s macroeconomic policies have failed — not just in the UK, but in all the G7 nations which coordinate economic and monetary policies.
But if Kwarteng is to replicate the success of Howe’s 1981 budget, he must bring the budget deficit under control as a matter of urgency. That is the source of inflation, and it is entirely the responsibility of the Treasury. The Bank of England may well be a waste of space, but it cannot be blamed for fiscal deficits.
The background to the mini budget
The political strategy was brave, as the cynics would have it. Kwarteng took the initiative and hit the ground running. As one of his first acts, he had already removed the incumbent permanent secretary to the Treasury, Sir Tom Scholar. In doing so, he has broken the Treasury out of the Whitehall group-thinking Keynesian bubble. Consequently, very few inside the Whitehall-Westminster establishment understand his economic strategy, and it is widely criticised.
But both Kwarteng and Truss have degrees in economics, and like Margaret Thatcher and Sir Keith Joseph in the late 1970s appear to be followers of Hayek rather than Keynes. Kwarteng is particularly interesting, having excelled at the heart of an Englishman’s environment. He was a King’s scholar at Eton, went on to get a double first in classics and history at Cambridge, and then to Harvard on a Kennedy scholarship where he gained a PhD in economic history.
Obviously, Kwarteng is no intellectual slouch, and probably understands the historic context of Keynesianism and John Law’s doppelganger economic and monetary policies which collapsed the French economy in 1720.
Only seventeen days after his appointment as Chancellor of the Exchequer, Kwarteng’s tax cutting budget certainly shows confidence in his approach. But that’s only half the job done. The other half must be to reduce the size of the state in the overall economy as rapidly as possible. A statement on that is scheduled for November, but there is now mounting pressure to bring that forward.
